Scenario: Accounting and Economic Profit Rather than put the $100,000 that his g

Question

Scenario: Accounting and Economic Profit Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000. (Scenario: Accounting and Economic Profit) The accounting profit of Wang's Wicker Furniture Store is: A. $30,000. B. $60,000. C. $200,000. D. $0.

Explanation / Answer

Total cost excluding the implicit cost = 20000 + 60000 + 40000 = 120000

Total cost including the implicit cost = 5% of 100000 + 60000 + 20000 + 60000 + 40000 = 185000

Total revenue = 150,000

This gives economic profit = 150,000 - 185,000 = -35000 and accounting profit = 150,000 - 120,000 = 30,000

Select 30,000. Option A.

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